Additional Efforts Are Needed to Ensure Taxpayer Rights Are
Protected When Manual Levies Are Issued

April 2004

Reference
Number:2004-30-094

This report has cleared the Treasury
Inspector General for Tax Administration disclosure review process and
information determined to be restricted from public release has been redacted
from this document.

This
report presents the results of our review to determine whether the Internal
Revenue Service (IRS) has complied with 26 United States Code (U.S.C.) Section
(§) 6330, Notice and Opportunity for Hearing Before Levy.The IRS Restructuring and Reform Act of 1998
(RRA 98) requires the IRS to notify taxpayers at least 30 days before
initiating any levy action, to give taxpayers an opportunity to formally appeal
the proposed levy.Specifically, we
determined whether the IRS has sufficient controls in place to ensure taxpayers
are advised of their right to a hearing at least 30 days prior to levy
action.This is the sixth annual report
the Treasury Inspector General for Tax Administration (TIGTA) has issued in
compliance with the RRA 98 to determine whether the IRS is complying with legal
guidelines over the issuance of levies.

Prior TIGTA reports have
recognized that the IRS has implemented tighter controls over the issuance of
systemically generated levies.This was
due primarily to the development of systemic controls in both the Automated
Collection System and Integrated Collection System (ICS) to prevent a
levy from being generated unless there were at least 30 days between the date
taxpayers received notice of their appeal rights and the date of the proposed
levy.Our testing of these controls
indicated that they continue to function effectively.

However,
last year’s report also discussed the fact that revenue officers sometimes
issued manual levies to taxpayers who were not properly notified of their
appeal rights.We recommended the IRS
require managers to review and approve
all manual levies prepared by revenue officers in order to ensure taxpayers are
properly advised of their appeal rights.The IRS declined to implement this recommendation but did issue a memorandum
on June 20, 2003, reminding revenue officers that proper notification must be
given to a taxpayer before a manual levy is issued.Our review of manual levies issued between July 1 and October 31,
2003, indicated that this corrective action was not effective.Revenue officers are still not always
properly notifying taxpayers of their appeal rights.Specifically, in 5 of 40 cases reviewed, we determined that
revenue officers issued manual levies to seize the assets of taxpayers who had
not been notified of their appeal rights.We recommended the Commissioner, Small Business/Self-Employed Division,
reconsider requiring managers to review all manual levies prepared by a revenue
officer.

Management’s Response:While IRS
management agreed that taxpayers’ rights must be protected, they did not agree
with our recommendation to have group managers approve all manual levies
prepared by revenue officers.They
expressed concern about the impact on field employees that further increasing
the oversight of enforcement action could have.IRS management also indicated they believe the errors evidence a
training issue.

To help address these
concerns and reinforce the existing procedures, the IRS issued an ICS Alert on
March 5, 2004.This Alert reminded
employees to ensure taxpayer rights are protected whenever a manual levy is
issued.Management’s complete response
to the draft report is included as Appendix V.

Office of Audit Comment:We
recognize the IRS’ caution in implementing any managerial action it believes
may inhibit effective enforcement action by revenue officers.However, we also recognize the importance of
the RRA 98 provision requiring that taxpayers be properly advised of their
appeal rights prior to asset seizure through levy action.We hope the IRS’ issuance of the ICS Alert
reminding revenue officers that all notice requirements must be satisfied
before a manual levy is issued will suffice to ensure taxpayer rights are
adequately safeguarded.While we still
believe our recommendation is worthwhile, we do not intend to elevate our
disagreement concerning it to the Department of the Treasury for
resolution.We will continue to closely
monitor this issue during future mandatory reviews of the IRS’ collection
activities.

Copies
of this report are also being sent to IRS managers affected by the report
recommendation.Please contact me at
(202) 622-6510 if you have questions or Parker Pearson, Acting Assistant
Inspector General for Audit (Small Business and Corporate Programs), at (410)
962-9637.

When taxpayers refuse to pay delinquent taxes, the Internal
Revenue Service (IRS) has authority to work directly with financial
institutions and other third parties to seize taxpayers’ assets.This action is commonly referred to as a
“levy.”The IRS Restructuring and
Reform Act of 1998 (RRA 98) requires the IRS to notify taxpayers at least 30 days
before initiating a levy action, to give taxpayers an opportunity to formally
appeal the proposed levy.

The RRA 98 also requires the Treasury Inspector General for
Tax Administration (TIGTA) to annually verify whether the IRS is complying with
the new provisions.This is the sixth
year that the TIGTA has evaluated the controls over levies.

Two operations within the IRS issue levies to collect
delinquent taxes:

·The Collection Field function (CFf), where revenue
officers contact delinquent taxpayers in person as the final step in the
collection process.Field contact
becomes necessary when the ACS does not resolve the tax matter.Delinquent cases that are assigned to revenue
officers in the IRS field offices are controlled and monitored with the
Integrated Collection System (ICS).

Both operations issue two types of levies:systemically generated levies and manual
levies.Previous TIGTA reports have
recognized the IRS has significantly improved controls over the issuance of
systemically generated levies.However,
the TIGTA’s June 2003 report did identify that additional controls are needed over manual levies issued by revenue
officers.

This
review was conducted at the Small Business/Self-Employed (SB/SE) Division
Headquarters in New Carrollton, Maryland, and at Compliance Area 3 and 11
Offices, headquartered in Philadelphia, Pennsylvania, and Denver, Colorado,
respectively.We conducted the audit
from October 2003 through February 2004 in accordance with Government Auditing Standards.

Detailed information on our audit objective, scope, and
methodology is presented in Appendix I.Major contributors to the report are listed in Appendix II.

Systemic controls in both the ACS and ICS are effective to
ensure taxpayers receive timely notification of their appeal rights.

ACS controls

The first step in the collection process involves mailing
taxpayers a series of notices asking for payment of delinquent taxes.If taxpayers do not comply, the majority of
the accounts are forwarded to an ACS Call Center where CSRs contact taxpayers
by telephone to resolve their accounts.If accounts cannot be resolved, CSRs have the authority to issue levies.

Virtually all levies issued by CSRs are generated through
the ACS’ automated system.This
automated system contains a control, developed to comply with the RRA 98,
that compares the date the taxpayer was notified of the pending levy with the
date requested for the actual levy.If
there are fewer than 30 days between the dates, the system will not generate a
levy.This control is designed to
ensure taxpayers have been notified at least 30 days prior to the levy and have
been informed of their appeal rights for any systemically generated levy.

We tested the effectiveness of this control by reviewing a
random sample of 30 systemically generated levies issued by the ACS between July
1 and October 31, 2003.All 30 taxpayers
were timely notified of their appeal rights.During fieldwork, we also tested the control by requesting a levy on a
live case for which fewer than 30 days had elapsed since the final notice
date.The system would not issue the
levy.Based on these results, we
concluded that the systemic controls over levies issued in the ACS Call Centers
effectively protect taxpayers’ appeal rights.

ICS controls

Many times, notices and telephone calls to taxpayers do not
successfully resolve delinquent accounts, and cases have to be assigned to
revenue officers in CFf offices for face-to-face contact with taxpayers.Cases assigned to revenue officers are
controlled on the ICS.Revenue officers
use the ICS to record collection activity on delinquent cases and generate
certain enforcement actions such as levies.

The IRS installed a control in the ICS similar to the
control in the ACS that prevents a levy from being issued unless taxpayers have
received 30 days notice and been informed of their appeal rights.If fewer than 30 days have elapsed since the
final notice date, the system will not generate a levy.

We tested the effectiveness of this systemic control by
reviewing a random sample of 30 ICS cases that had levies issued between
July 1 and October 31, 2003.All
30 of the taxpayers had received notification of their appeal rights at least
30 days prior to the levy.Next, we
tested the control by attempting to generate a levy on a live case for which
fewer than 30 days had elapsed since the final notice date.The system would not issue the levy.

Finally, we tested another systemic control by attempting to
alter a critical date in the ICS history section.We could not alter the date to generate the levy.Based on these results, we concluded that
the systemic controls over levies issued by revenue officers in CFf offices
effectively protect taxpayers’ appeal rights.

While the IRS has done an effective job of implementing
controls over systemic levies generated by the ACS and ICS, additional controls
are needed over manual levies issued by revenue officers.

The second type of levy that both CSRs and revenue officers
can issue is the manual levy.That is,
the levy is issued outside of the ACS and ICS automated processes and is not
subject to the systemic controls.

Because manual levies are issued outside of the ACS and ICS
automated processes, an automated audit trail for these actions is not
produced.Therefore, it is impossible
to reliably determine the exact number of manual levies that were issued by
either CSRs or revenue officers during our review period.IRS management did inform us that they
believe manual levies are issued infrequently.

Although the ACS CSRs primarily issue levies systemically,
they also issue manual levies under certain circumstances, such as levies on
Individual Retirement Accounts and jeopardy situations.Manual levies require the same advance
notification of the taxpayer as systemic levies except in cases involving
jeopardy situations.IRS procedures
require that manual levies issued by CSRs be reviewed and approved by a manager
prior to the levy being issued.We
consider this managerial review to be a strong control.

Revenue officers similarly issue levies systemically, in
most cases, through the ICS.They are
also authorized to issue a manual levy on any case as needed.While managerial approval is mandatory for
manual levies issued by ACS employees, no review or approval is required when
revenue officers issue a manual levy.

We believe there is a high risk associated with these manual
levies because the IRS has not implemented any controls to ensure taxpayers’
appeal rights are protected as required by the RRA 98.Our June 2003 report discussed the fact that
revenue officers sometimes issued manual levies to taxpayers who were not
properly notified of their appeal rights.We recommended the IRS require managers to review and approve all manual
levies prepared by revenue officers in order to ensure taxpayers are properly
advised of their appeal rights.The IRS
declined to implement this recommendation because it believed it would impede
prompt enforcement action.The IRS did
issue a memorandum on June 20, 2003, reminding revenue officers that proper
notification must be given to a taxpayer before a manual levy is issued.

We analyzed the ICS case inventory assigned to revenue
officers to identify any manual levies issued between July 1 and October 31, 2003.Because there is no automated audit trail
produced for manual levies, we analyzed case history comments for any
references to a manual levy.Using this
methodology, we identified 40 cases in which a manual levy was issued to seize
taxpayers’ assets.In 5 of the 40
cases, the revenue officer did not properly notify the taxpayers of their
appeal rights before issuing the manual levies.None of the five manual levies involved jeopardy situations.Because of the imprecise nature of revenue
officer case history entries, there could have been significantly more manual
levies issued during our review period than the 40 we identified.

Not offering appeal rights to taxpayers prior to issuing
levies is a potential Section 1203 violation of the RRA 98 and could result in
the revenue officer being terminated for misconduct.We have referred the five cases to the TIGTA Office of
Investigations for further evaluation.

1.
The
Commissioner, SB/SE Division, should reconsider developing and implementing
controls over manual levies issued by revenue officers working in the IRS field
offices to ensure taxpayers are properly offered their appeal rights.At a minimum, the Commissioner, SB/SE
Division, should require that manual levies be reviewed and approved by a
manager.This would help ensure the 30‑day requirement has been
met before levy action.

Management’s Response:While IRS management agreed that taxpayers’ rights must be
protected, they did not agree with our recommendation to have group managers
approve all manual levies prepared by revenue officers.They expressed concern about the impact on
field employees that further increasing the oversight of enforcement action
could have.IRS management also
indicated they believe the errors evidence a training issue.

To help address these concerns and reinforce the existing
procedures, the IRS issued an ICS Alert on March 5, 2004.The Alert reminded employees to ensure
taxpayer rights are protected whenever a manual levy is issued.It also included a reminder that the final
notice issued by the campuses does not contain the appropriate due process
notification.

Office of Audit Comment:We recognize the IRS’ caution in implementing any managerial
action it believes may inhibit effective enforcement action by revenue
officers.However, we also recognize
the importance of the RRA 98 provision requiring that taxpayers be properly
advised of their appeal rights prior to asset seizure through levy action.We hope the IRS’ issuance of the ICS Alert
reminding revenue officers that all notice requirements must be satisfiedbefore a manual levy is issued will suffice
to ensure taxpayer rights are adequately safeguarded.We will continue to closely monitor this issue during future
mandatory reviews of the IRS’ collection activities.

The overall objective of this
review was to determine whether the Internal Revenue Service (IRS) has complied
with 26 United States Code (U.S.C.) Section (§) 6330, Notice and Opportunity for Hearing Before Levy.To accomplish our objective, we:

I.Determined whether the IRS was maintaining sufficient
automated controls and procedures to ensure taxpayers had been advised of their
right to a hearing at least 30 days prior to any levy action.

A.Performed a walk-through of two Automated Collection System
(ACS) Call Centers and four Collection Field function offices and evaluated
procedures and controls over due process notices.

B.Tested whether systemic controls in the ACS and the Integrated
Collection System (ICS) were preventing levies from being issued in fewer than
30 days from the final notice date.

C.Tested whether IRS employees could modify the final notice
date in the ACS and ICS.

D.Selected
a random sample of 30 ICS levies from the population of 110,670 levies issued
between July 1 and October 31, 2003, from the ICS database of open cases.We analyzed Master File transcripts and the
ICS record history for the sample cases selected and verified whether taxpayers
had been advised of their right to a hearing at least 30 days prior to any levy
action.We
did not use statistical sampling because, based on prior years’ testing, we did
not anticipate finding any errors; consequently, we would not need to project
our results.

E.Selected a random sample of 30 ACS levies from the population
of 510,288 levies issued between July 1 and October 31, 2003, from the ACS
database of open cases.We analyzed
Master File transcripts and the ACS record history for the sample cases
selected and verified whether taxpayers had been advised of their right to a
hearing at least 30 days prior to any levy action.We did not use statistical sampling
because, based on prior years’ testing, we did not anticipate finding any errors;
consequently, we would not need to project our results.

A.Identified any references to manual levies issued between July
1 and October 31, 2003, by querying the narrative history text field of the ICS
open case inventory.We identified a
population of 40 manual levies that were issued during our review period and
included all of them in our review.

This appendix presents detailed information on the
measurable impact that our recommended corrective action will have on tax
administration.This benefit will be
incorporated into our Semiannual Report to the Congress.

Type and Value of Outcome Measure:

·Taxpayer Rights and Entitlements – Actual; five
taxpayers did not receive notice of their appeal rights before the Internal
Revenue Service (IRS) took levy action (see page 4).

Methodology Used to Measure the Reported Benefit:

We analyzed (using computerized queries) the Integrated
Collection System case inventory of delinquent taxpayers assigned to revenue
officers and identified 40 manual levies issued between July 1 and October 31,
2003.Since the IRS does not monitor or
record the use of manual levies, we were unable to determine the total number
of manual levies actually issued by revenue officers working in field offices.Because the population of manual levies is unknown, the findings of our
case review cannot be projected.